The Benefits and Drawbacks of a 401k Transfer

If you are employed by a company that offers a 401k plan that you have been contributing to while you worked there, you know how beneficial it can be in terms of helping you save for retirement.

However, if you are considering leaving your company for other employment, you will need to determine whether or not you want to make a 401k transfer or leave your money in your company’s 401k. There are benefits and drawbacks to both strategies, but until you know what those are, you shouldn’t be in too big of a hurry to make your decision.

You are under no obligation to remove your money from your company’s 401k. You can leave it there for as long as you want, but you won’t be contributing any more money to it, since your contributions are made through your paycheck. Still, it won’t hurt you to leave the money in there for a while until you determine whether or not a 401k transfer is right for you.

The Benefits of a 401k Transfer:

A retirement fund transfer is more often referred to as a rollover. This is because you are basically rolling your money over from one type of retirement account to another type.

The biggest benefit of rolling over your 401k is that you don’t have to pay any taxes or penalties for taking your money out of your account before you reach retirement age. In most cases, you are not allowed to withdraw your retirement funds from a 401k until you are 59 ½. If you do decide to take it out early, you will not only have to pay income taxes on the amount you withdraw, but you will also have to pay an early withdrawal penalty of 10 percent. This is a significant amount of money you lose if you choose not to roll over your funds.

Another benefit of transferring your 401k funds is that you will be able to continue investing those funds without interruption. When you remove your funds, all investment activity ceases, even if you intend to put it back into another retirement fund in the near future. If you request a withdrawal from your 401k, you will have to pay taxes and penalties on that amount. If you intend to roll over your 401k balance yourself, then you will receive your money tax and penalty free, but you have to put it in another retirement account within 60 days to avoid those penalties.

Most financial advisers recommend that if you are going to complete a 401k transfer, you should perform a direct rollover so that you never even see the funds. The administrator for your 401k plan will work with the administrator for your new retirement plan to execute the transfer. You will not have to worry about the 60-day deadline and you won’t be tempted to keep the money out of a retirement account once you have it.

The Drawbacks of Transferring Your 401k:

There are very few drawbacks to rolling over your 401k to another type of retirement account. This is because your money will continue to grow, even if you are thinking about taking out the money early for financial reasons. You don’t have to rush to make a decision about withdrawing your money, but if you looking to get a lump sum payment to pay off bills or other financial obligations a 401k rollover is not going to benefit you in any way.

In addition, you might want to leave your money in your 401k instead of rolling it over if you think you might need to take out a loan against your retirement fund at any point in the future. By rolling over your funds to an IRA, you will lose the ability to borrow against your savings if that need ever arises. Leaving your money in your company’s 401k will protect your loan capabilities, but again, you won’t be contributing any more money to that 401k, nor will your company be making matching contributions after you leave the company.

In most cases, it makes sense to request a 401k transfer if you are leaving your company and will no longer be contributing to the 401k. However, there are some exceptions to that rule, as indicated above. Take some time to think about your options before pulling the trigger so that you know for sure you are making the right retirement decision for you and your family.

IRA vs 401k Central is for entertainment and reference purposes only. The information presented is the opinion of the author only and should not be interpreted as specific advice or recommendations towards your financial situation. Always consult with a true professional before making any financial decisions.

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